Exotic Options and Hybrids: A Guide to Structuring, Pricing and Trading, by M. Bouzoubaa and A. Osseiran, John Wiley & Sons (2010). Hardback. ISBN 0470688033.
Anyone who has taken an introductory course in mathematical finance will be familiar with vanilla options and the basic elements of pricing and hedging in simple settings. However, even the most novice learners of quantitative finance quickly start asking for more examples from the real world, and for hands-on demonstrations of how the elements of learned theory might manifest themselves in realistic settings beyond the idealised ones demonstrated in class. The book of Mohamed Bouzoubaa and Adel Osseiran gives the reader exactly this behind the scenes sought after view into the exciting world of structured products and exotic derivatives, taking the reader on a comprehensive tour of different products. The authors discuss first-hand experience and real-life analytics for these products to highlight significant aspects of the business. For this, numerous examples are presented and adoptions of real trades are examined in detail.
In this book, two experienced and renowned senior practitioners, Adel Osseiran and Mohamed Bouzoubaa, take us on a tour in the world of derivative products to aid the interested reader in closing the gap between theory and practice. Indeed, for an impressive range of product classes, the presented setup succeeds in connecting formal theory with hands-on examples. Each chapter is devoted to a respective product class where a brief introductory part (recalling basic principles and establishing notation) is followed by first-hand experience from structuring practices. Mohamed Bouzoubaa and Adel Osseiran present the subject armed with a wealth of professional experience spanning a range of top investment banks from a stance of rigorous academic training. Bouzoubaa is currently Head of Derivatives and Trading at CDG Capital and author of a number of textbooks including the present monograph as well as ‘Equity Derivatives Explained’ (Palgrave Macmillan, 2014). Osseiran is an Oxford-trained mathematician with a PhD from ICL who has worked in various front office roles over the past years. The duo perfectly caters to the needs both of young aspiring quantitative analysts who wish to familiarise themselves with Exotic Options as well as to those of experienced professionals who seek an easy-to-navigate lookup guide to recall a few concepts, with succinct digestible explanations and a clear comprehensive structure. It also speaks volumes about the authors' understanding of market needs that the book is accompanied by a website which features an interactive zone as well as extended resources.
The book itself is divided into four parts. Part I lays the foundations of basic instruments and concepts used in the book and makes a first introduction to the world of structured products on both the Buy Side and the Sell Side alike. Readers who have completed an introductory course in financial mathematics will feel at ease reading this part and encounter many familiar concepts from a new perspective. This paves the way for a seamless transition to the later chapters of the book. Parts II and III contain an account of exotic derivatives and more involved exotic structures. In these parts, the building blocks of options such as Digitals, Barriers and Dispersion are covered. These are followed by structures of increasing complexity, including multi-asset Autocallables to Cliquet-related structures, leading to the end of Part III, which closes with a walk through volatility derivatives. Having covered a wide range of derivative products in Parts I-III, the last part of the book (Part IV) presents to the reader a nice bouquet of hybrid products containing elements of the previous chapters and it gives a brief account of their pricing and associated dynamic trading strategies. For readers to be able to fully benefit from the book, it is an advantage if they are already familiar with pricing and hedging. The book sets out by briefly recalling the fundamentals, thereby creating an anchor for later chapters, where adoptions of real trades are examined in detail and progressively presented in a more practical, non-mathematical and highly intuitive setting. A solid formal understanding of the basics will help readers connect the dots between practical examples and mathematical formalism.
To date, this monograph has been already on the market for several years, but due to recent developments governing modern day finance, its relevance has had a renaissance. The original motivation of the authors was fuelled by the 2007–2008 financial crisis, which has revealed many of the misunderstandings and misuses of exotic derivatives on both the buy and sell sides. At the time of the crisis, the apparent confusion and misunderstandings surrounding exotic derivatives fuelled the need for an explanatory reference work for market participants both on the buy-side and the sell-side. This need prompted the authors to provide clarification and explanation in the form of a textbook. Exotic Options and Hybrids is an easily accessible practical guide to structuring, pricing and hedging complex exotic options and hybrid derivatives. Today, at a time where machine learning and automated routines are gaining more and more traction, the need for such comprehensive clarifying guides has been having a revival. At a time when the potentials of deep learning have set the established routines into a motion of gradual transformation, the present book stands out as it is targeted specifically at the intersection of theory and practice in a traditional sense. While AI and ML augmented (black-box) routines are often said to suffer from issues of interpretability, this monograph has the potential to reinforce modellers' intuition. This, in my opinion, is a particularly noteworthy advantage of the book at this time, in addition to the aforementioned features of bridging the gap between theory and practice. In particular, the monograph highlights the strengths and limitations of various models, with relevance to the products, which enable users to manage their own risks. Be it a seasoned professional who seeks to revisit the basics amidst the onset of a changing perspective, or be it a fresh graduate joining the ranks of quantitative analysts in the turmoil of this transition, reinforcing the understanding of complex products and strengthening the intuition of how prices should behave, will be extremely useful. If readers learn how to spot the risks, it can be vital for the sound valuation and hedging of these complex products. It remains to be seen how this revived understanding will be translated into next-generation algorithms, but needless to say a reliable solid intuition can help in the early detection of major pricing errors. Further down the line, the efficiency of the next generation routines and the sturdiness of the models we build, will reflect our understanding of the products. An easily accessible monograph guiding and training our intuition that provides a reliable backup for our understanding of these products is needed now as much as ever. This book is an excellent read for graduate students, researchers and practitioners who are active (and for those who strive to become active) in this field.
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Notes on contributors
Blanka Horvath
Blanka Horvath is an Assistant Professor in Mathematical Finance at TU Munich, and a Lecturer at King's College London. Blanka holds a degree in Mathematics from the University of Bonn, a degree in Economics from the University of Hong Kong and a PhD in Financial Mathematics from ETH Zurich. Her current research interests revolve around rough processes, their asymptotic and numerical properties and their applications in finance. She is a recipient of the 2020 Rising Star award of Risk and is a currently co-organiser of the Machine Learning in Finance theme at The Alan Turing Institute.